It is quite different entrepreneurial spirit to go for a startup or a promising idea to launch your startup. So, now you are going to raise money for your startup ideas. You have a product, concept and little traction, it is now a time you need to grow. Whom you can talk to? Let us tell you, you don’t know what you have to. Let us make you know giving you the intro guide for Fundraising.
In the modern business scenario, funding and fundraising act as the major constituents which support the growth of a Startup. Fundraising is important for the startups along with the funding procedure. When these two business components come together, they have a rich potential to contribute to the growth of a startup. Then we use the term for this creative space — the incubator — calls to mind the warmth, coziness, and protection of a womb.
There comes a point, though, when a company needs to move from big ideas toward an actual product. To do this, you need to think about generating money. But how do you get money before there is even a product to sell? Fundraising (but not the charity kind).
When startups raise money, they do it with rounds of investments. The first is called the seed round and, if the company starts to find traction, there will be a Series A-B-C, all the way until they either go public (IPO), sell, or run out of steam. In each round, the company receives money from venture funds. Different funds specialize in different points in a company’s growth, and matching with the right funds can be crucial to your success as they often provide more than just capital infusions.
‘What are the stages of Fundraising?’
Startups often look at fundraising only as a means to making money to accomplish their agendas and pay their staff, so much that they neglect to integrate fundraising into their plan as a whole. Startup ideas that do incorporate fundraising and development into their organizational strategy are the ones that end up being successful, however. Why? Because fundraising makes your organization stronger and eventually high functioning. Fundraising is important for the startups along with the funding procedure. When these two business components come together, they have a rich potential to contribute to the growth of a startup. Whenever an investor starts funding for a startup on a small or large scale, he has to plan his actions according to the goals of chosen business organization. However, funding plans vary depending on the type of results expected by startup. Below are the stages of Fundraising, you should understand thoroughly, they are:
1. SEED Investment:
This is usually a small amount of money given to a company to give it the bare bones resources it needs to produce its initial product, or minimum viable product (MVP). Normally, the startup will have a well-formed concept and a plan for bringing it to market, but they won’t have a working prototype just yet. Seed investment gives the company enough runway to move from this early conceptual phase toward a product.
When a company has a prototype or even a basic version of their product on the market, they can seek funding from a venture capital group to work toward building momentum. The Series A funding will be larger than the Seed Round (historically somewhere between three and seven million dollars). And, as is with all the funding rounds, with the Series A you will be giving up equity (aka. A percentage of your ownership in the company) for the incoming cash investment. Startups often use Series ‘A’ funding to fine tune their business model and to work out the nuts and bolts of moving their product to market.
By the time they’ve reached a Series B round, a startup has a product and a proven business model, but they need the burst of momentum (also known as capital) to reach more people more quickly. This represents a significant increase in the funding, from $7 million to upwards of $50 million.
This is all about fast growth. In Series C funding, companies might move the work they’ve been doing in Series B toward international markets or focus on diversifying their product for multiple different platforms.
‘Major sources of Fundraising / Funding, you must know’
1. Venture Capitalists (VCs):
A venture capitalist is a person or company that invests in a business venture, providing capital for startup or expansion. However, individual venture capitalists are a rarity; the majority of venture capital (VC) comes from professionally managed public or private firms. Their business is to pool investment funds from various sources and find and invest in businesses that are likely to provide their investors with high rates of return. Venture capitalists manage large pools of money — think several million to several billion dollars in assets under management (AUM). VCs operate what are called funds, and they typically have approximately 10-year lifespans (plus options for an additional two years).
Because venture capital firms want higher return rates than other investments, such as the stock market, provide, they typically invest in promising startup or young businesses that have a high potential for growth but are also high risk. Venture capital firms typically invest in business sectors such as IT, bio-pharmaceuticals, clean technologies, semiconductors, etc.
2. Angel Investors:
An angel investor (also known as a private investor, seed investor or angel funder) is a high net worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.
Angels, unlike many VCs, start not as investors, but as operators in the industry. Whether as entrepreneurs or employees, angels are individuals that accrue significant wealth. They should have a minimum $1M net worth (excluding their primary residence) or greater than $200k per year in income for at least two years. They then reinvest their capital in upstarts. Some angels shoot for returns, and others just look to give back.
A wealth of angel investors is the mark of a healthy startup ecosystem. The more successful founders exiting and reinvesting into the next wave, the greater the density of talent, innovation, and successful outcomes.
3. Angel Groups:
As the name suggests, angels often form groups. There is power in numbers, and groups of angels can cut larger checks, get better terms, spread out due diligence, and leverage larger networks to help startups succeed.
Typically, angel groups charge anywhere from $100–$1000 per year in dues. These dues help run the network and manage events.
In many cases, businesses that set up a syndicate operate in the same industry—several financial services or media companies will band together to form a syndicate. A separate entity is created to apply their expertise to a product or service. Syndicates are generally considered a partnership or corporation for tax purposes.
Ever since the JOBS Act in 2012, the world of investing has been very different. This bill created the ability to form special purpose vehicles (SPVs) to invest in companies. Syndicates use this structure to allow groups of up to 99 investors to invest in startups via a single SPV — meaning only one addition to the cap table.